Republic’s Goals for Chautauqua Within Sight

Republic Airways’ efforts to “restructure” its Indianapolis-based Chautauqua Airlines subsidiary appear to have yielded their intended results. During a November 1 conference call to discuss the company’s third-quarter earnings, Republic CEO Bryan Bedford reported that the regional airline holding company has found a way to mitigate future negative cash flows at Chautauqua by some $45 million over five years, largely by reaching new business agreements with several “key stakeholders ” and returning idled aircraft to revenue service.

“This is an important milestone in our Chautauqua restructuring effort,” said Bryan Bedford, chairman, president and CEO of Republic Airways. “These agreements take us about three-quarters of the way to our stated need of $60 million in average annual cash flow improvements at Chautauqua to stabilize and secure its future. We still have approximately two-thirds of our small-jet fleet of 70 aircraft operating under capacity purchase agreements (CPAs) with less than two years remaining, so we are focused on ensuring both our labor productivity and long-term maintenance costs of these aircraft remain competitive.”

Republic has also amended its CPA between Chautauqua Airlines and Delta Air Lines to allow for the operation of another seven Embraer ERJ 145s for a one-year period. It plans to place all seven of the 50-seat jets into service as Delta Connection by the end of this month. Before the amendment, Chautauqua flew a total of 24 ERJ 145s under a CPA that runs through May 2016.

“The deployment of these seven aircraft, combined with our other recent CPA activity, means we will have placed all remaining idle 50-seat regional jet aircraft back into revenue service by the end of 2012,” said Bedford. “Ensuring our 50-seat aircraft remain active under agreements with our major airline partners is an important component of our Chautauqua restructuring effort.”

Overall, block-hour productivity at Republic Airways–parent company of Chautauqua, Republic Airlines and Shuttle America–fell 4 percent compared with the same period a year earlier due largely to the grounding of the ERJ 145s, while unit costs excluding fuel but including interest increased 7.3 percent, to 8.74 cents per ASM from 8.15 cents during the third quarter of 2011, reported CFO Tim Dooley. Chautauqua’s idled regional jets contributed $5 million, or .15 cents per ASM, of costs to Republic’s balance sheets. “Finally, our third-quarter results do not include any benefits of our Chautauqua restructuring program,” said Dooley. “So as we place aircraft back into revenue service, as we expand our [Bombardier] Q400 fleet operating for United [in place of Colgan Air] and as we recognize the benefits of our Chautauqua restructuring program, Republic should see a meaningful decrease in its unit costs.”

Republic began the process of restructuring Chautauqua at the beginning of the year, at which time it set its cost savings target. It still needs to finish negotiating new contracts with several maintenance vendors and effect “other business initiatives,” to reach its $60 million goal, said Bedford. Nevertheless, the CEO expressed satisfaction with the progress so far. “When we started 2012 we were scheduled to have more than 25 regional jets and Q400s parked,” said Bedford. “However, because of the efforts of our team and help from our business partners, that number is expected to be zero at the end of the year.”

Given the Chautauqua restructuring and assuming the company can maintain “competitive” labor contracts, Bedford described Republic’s 50-seat business as a “break-even proposition,” but one that it can maintain until the airplanes’ leases naturally expire. “On the E-Jet side, I think we’ve actually got a good business there,” he said.

In a seeming reversal in industry trends and for the first time in a number of years, Republic expects to see “several” opportunities for large-capacity RJ expansion with its major partners in 2013 and 2014, added Bedford. Still, he said he expects Republic and most regionals will show discipline in pursuing new business due to the lack of profitable airplanes on the used market and an unattractive lease finance environment.

“Frankly, if we’re going to go out and talk about investing in new equipment, whether it’s us or a competitor or even a mainline partner, everybody’s going to have to get a fair return on invested capital…or we’re just not going to invest the cash. We’ll give it back to our shareholders.”

Still in the process of separating from low-fare carrier Frontier Airlines, Republic flies fixed-fee service for American Airlines, United Airlines, Delta Air Lines and US Airways with its three regional subsidiaries.